Global markets prepare for aftershocks as SVB collapse ripples out

SYDNEY, March 13 (Reuters) – Markets were in for a bumpy ride this week as the fallout from the collapse of startup-focused lender Silicon Valley Bank (SVB), the largest US bank failure since the 2008 financial crisis, coincides with major economic data and policy meetings.

S&P500 futures rose 1.4% after US authorities guaranteed that SVB clients would be able to access their deposits from Monday. Futures later eased to 0.7% gains

“No losses related to the Silicon Valley Bank resolution will be borne by taxpayers,” said a statement from the U.S. Treasury Department, Federal Reserve and Federal Deposit Insurance Corp.

In Australia, the first major market to trade in Asia Pacific, the S&P/ASX200 (.AXJO) fell 0.3% in early trading.

“What investors can expect tomorrow and beyond is that we will face a lot of event risk,” said Michael Purves, CEO of Tallbacken Capital Advisors in New York.

“There will still be lingering questions from other regional banks. Under such a scenario, it’s hard not to expect continued very high interest rate volatility.”

The US February inflation data will be released on Tuesday, followed by the UK budget on Wednesday and the European Central Bank interest rate meeting on Thursday, adding to the risk factors for the markets.

“We have a tough ride ahead of us,” said Pooja Kumra, senior interest rate strategist for Europe and the UK at TD Securities in London.

US stock market volatility, as measured by the “fear index,” the VIX (.VIX), had already skyrocketed on Friday to its highest level since October, while the ICE BofA Move Index (.MOVE), a measure of the volatility in the US fixed income market rose to the highest level since mid-December.

Stock markets in the Middle East closed lower on Sunday, with the Egyptian stock market leading the way. In Qatar, nearly all stocks were negative, including Qatar Islamic Bank (QISB.QA), which plunged 3.9%.

In another sign of potential contagion from other assets, stablecoin USD Coin (USDC) lost its dollar peg and fell to an all-time low on Saturday. It later recovered most of its losses after Circle, the company behind it, assured investors it would honor the peg despite exposure to Silicon Valley Bank.

Still, unrest over the banking sector is likely to persist.

Investors enter Monday’s trading day with little time to digest the latest developments.

SVB could have a domino effect on other US regional banks and beyond. US regional and smaller banking stocks were hit hard on Friday. The S&P 500 regional banking index (.SPLRCBNKS) fell 4.3%, bringing the loss for the week to 18%, its worst week since 2009.

POTENTIAL HIT

The British government on Sunday did everything it could to minimize damage to the country’s technology sector. Prime Minister Rishi Sunak said the UK government is working on a solution to mitigate the potential blow to businesses from the bankruptcy of SVB’s UK subsidiary.

Consulting firm Rothschild & Co is exploring options for the subsidiary amid threats of insolvency, two people familiar with the talks told Reuters. The BoE has said it is seeking an injunction to place the UK arm in insolvency proceedings.

In Asia, the bankruptcy of the SVB has left many Chinese funds and tech startups in the lurch as the bank has been a key funding bridge for groups operating between China and the US, the Financial Times reported Sunday.

SVB’s Chinese joint venture said on Saturday that it has a solid corporate structure and an independently operating balance sheet.

As expectations for further rate hikes in the United States and Europe have increased, investors are wondering whether the turmoil in the banking sector could force central banks to rethink.

Investors will be focused on the ECB, which is about to make another sharp rate hike on Thursday. A surprising rise in underlying inflation in February has led policymakers to fear that price pressures could continue.

The ECB will be vigilant about the risks of possible contagion and will ensure that there is sufficient liquidity in the system, said Marchel Alexandrovich, European economist and partner of Saltmarsh Economics.

And if a tough week hits the markets, ECB President Christine Lagarde may “send a more cautious message,” he said.

UK Chancellor of the Exchequer Jeremy Hunt’s UK budget may be overshadowed by the impact of the SVB in Britain. Hunt is expected to prioritize keeping public finances stable and oppose giveaways that could destabilize sterling, stocks or gilts.

But broad estimates for new government borrowing needs make the outlook for government bonds uncertain.

Reporting by Dhara Ranasinghe in London; Additional reporting by Ira Iosebashvili in New York and Scott Murdoch in Sydney. Adapted by David Holmes, Diane Craft, Lisa Shumaker and Lincoln Feast.

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